The Hawaii Employees’ Retirement System still has 26 years to go before it’s fully funded, but it continues to inch closer to that threshold.

Strong investment returns and steps taken over the past four years by the pension plan’s trustees, former Gov. Neil Abercrombie and the state Legislature, helped increase the fund so as of June 30 it was at 61.4 percent of where it needs to be to pay all the pensions promised, according to an independent actuarial report by Dallas-based Gabriel Roeder Smith & Co. That’s up from 60 percent as of June 2013 and 59.2 percent as of June 2012.

The fund finished the fiscal year that ended June 30 with a 17.8 percent investment gain, which followed on the heels of a 12.3 percent gain the previous year. The fund targets an annual 7.75 percent fiscal-year return to help fulfill its pension obligations.

"With a positive 17.8 percent return and the impact of previous legislation, it puts us in a positive direction toward becoming fully funded and a sustainable system," ERS Administrator Wes Machida said Monday.

The ERS pension plan provides retirement, disability and survivor benefits to 118,466 active, retired and inactive state and county employees.

The retirement system is now expected to be 100 percent funded by June 30, 2040, rather than June 30, 2041, as was estimated last year, according to the actuary’s report presented Monday to the ERS trustees. The funding period to pay down the unfunded liability decreased to 26 years in 2014 from 28 years in 2013 on an actuarial basis.

"Although (the funded ratio) is where we expected it to be — slightly positive (from the previous year) — we have to continue to monitor the activities and take the necessary steps to continue to move our funding in a positive direction," Machida said.

The unfunded liability rose slightly to $8.58 billion at the end of the last fiscal year, up from $8.49 billion a year earlier.

The unfunded liability is derived from the total pension liability minus the assets that the ERS has in its portfolio. If the pension liability continues to grow at a higher rate than the assets, then the unfunded liability will grow as well.

The pension fund had a market value of $14.2 billion as of June 30, according to the annual report. The market value of the pension fund was $12.4 billion on June 30, 2013, and $11.3 billion on June 30, 2012.

Under pension reforms, the level of overall benefits was lowered for new members after June 30, 2012. The vesting period was extended for those members, and the amount that both the members and employers must contribute to the system was increased. The employer contribution for police and fire employees was increased to 25 percent of payroll as of July 1, 2015, from 22 percent on July 1, 2012, and for all other employees, such as teachers, it was boosted to 17 percent from 15.5 percent during that same period. For most new members, employee contributions increased to 8 percent from 6 percent. But for police and fire, it increased to 14.2 percent from 12.2 percent.

"Until the contribution level achieves 17 percent for general employees and 25 percent for police and fire, the unfunded liability is expected to increase slowly," Machida said.

The Legislature also passed measures that eliminated and reduced, for new members, the availability of pension spiking, a practice in which employees would work a lot of overtime toward the end of their careers to significantly boost their retirement benefits. For an existing member, an employer will have to pay the ERS for pension spiking in the year after the employee retires. That is accomplished by paying the difference between what was funded at the lower salary and what should be funded as a result of the pension spiking at the higher salary. In addition, a moratorium was placed on any enhanced pension benefits until the system is 100 percent funded.

Machida said the ERS is planning to introduce legislation that is currently being reviewed in the governor’s office that would help with the unfunded and pension liabilities.

"We are proposing to change methodology to charge actual costs of purchasing eligible years of service," he said. "The previous method was designed long ago and has since been outdated."

While the state’s largest public pension fund is facing an upward battle, the state’s general fund is in better shape. The Abercrombie administration announced in July a $664.8 million budget surplus as of June 30. That was down from a record $844 million surplus in the previous year.

TRACKING THE MONEY

The Hawaii Employees’ Retirement System unfunded liability worsened in fiscal year 2014 even as the actuarial funded ratio improved:

* Fiscal years end June 30 of each year
** Based on open group projection, recognizing new benefits for members hired after June 30, 2012, and increasing contribution patterns for future fiscal years

Source: Gabriel Roeder Smith & Co.